[Why&Next] "To Sell or Not to Sell?"... The Complicated Calculations Insurers Face with Fifth-Generation Indemnity Insurance

Despite Structure to Curb Excessive Non-Covered Treatments, Insurers Remain Cautious
Premiums Halved, but Fears of Worsening Loss Ratios Persist
November Launch of Discount Riders and Conversion Options: Existing Policyholder Movement Will Be the Tipping Point

The insurance industry is experiencing mixed feelings regarding the recently launched fifth-generation indemnity health insurance. While financial authorities have explained that the restructuring aims to reduce excessive non-covered medical treatments and lower the premium burden for subscribers, insurers themselves remain cautious about aggressively expanding sales. Some companies are restricting sales through general agencies (GA) or selectively targeting new subscribers in their sales strategies. This is seen as a response to concerns that the structure, which lowers premiums but also reduces coverage, is dampening consumer enthusiasm and could potentially worsen both loss ratios and profitability.

The Launch of 5th-Generation Indemnity Insurance: Consumers Are Hesitant, Insurers Remain Cautious

As of May 14, according to the insurance industry, a total of 16 insurers—including seven life insurance companies and nine non-life insurance companies in Korea—have begun selling fifth-generation indemnity health insurance since May 6.

The core feature of the fifth-generation indemnity insurance is that it divides non-covered medical items into severe and non-severe categories, and reduces coverage for certain non-severe non-covered treatments that have been controversial for overuse, such as manual therapy, extracorporeal shock wave therapy, and non-covered injections. In return, premiums have been lowered by 40 to 50 percent compared to previous products. Through this, financial authorities aim to alleviate chronic deficits in the system and improve premium equity among subscribers.

The first- and second-generation indemnity insurance products have higher premiums but offer lower out-of-pocket costs and broader coverage. In contrast, the fifth-generation products come with lower premiums but reduced non-covered coverage, making the pros and cons for consumers more pronounced. This may be attractive to younger consumers who use medical services less frequently, but for those who often use manual therapy or non-covered injections, maintaining their existing policies may be more advantageous.

Initially, there were expectations that the lower premiums of the fifth-generation products would boost demand, but actual responses in the field have been more subdued than anticipated. More than half of the insurers have yet to launch such products, and some companies are limiting sales to exclusive agents or are not in a hurry to expand sales via online or GA channels. Efforts to encourage existing first- and second-generation policyholders to switch are also being approached conservatively.

The primary concern for insurers is the loss ratio. Indemnity insurance is already considered the industry’s representative loss-making product. According to the industry, as of the third quarter last year, the cumulative loss ratios were 113.2% for the first-generation, 112.6% for the second-generation, 138.8% for the third-generation, and 147.9% for the fourth-generation products. The combined risk loss ratio stood at 119.3%, meaning that for every 100 won collected in premiums, about 119 won was paid out in claims.

The issue with the fifth-generation indemnity insurance is its significantly reduced premium structure. If premium income decreases, even a small number of claims could rapidly worsen the loss ratio. In particular, preferred subscribers who rarely visit hospitals are likely to move to the more affordable fifth-generation plans, whereas subscribers who frequently use non-covered treatments are likely to remain with the existing first- and second-generation products. In this scenario, the loss ratios for the older generations could deteriorate further, and for the new generation, claims could surge over time as the subscriber base ages—this is the industry’s perspective.

Given these circumstances, insurers are taking a cautious approach, monitoring trends in the loss ratio and the contractual service margin (CSM) rather than pursuing aggressive sales expansion. A financial sector official stated, “The fifth-generation indemnity insurance has a clear policy direction to lower premium burdens and reduce excessive non-covered treatments, but from the insurer’s perspective, it is still difficult to be confident about stabilizing the loss ratio.” He added, “Consumers must consider whether to accept reduced coverage, and insurers are concerned about profitability deterioration, so for now, limited sales focused on new subscribers and a wait-and-see stance are expected.”

Will Discount Riders and Conversion Options Motivate Existing Policyholders?

There are also predictions that, as the financial authorities plan to introduce optional discount riders and policy conversion options for first- and second-generation policyholders starting in November, the impact on insurers’ profitability could become even greater if existing policyholders begin to move en masse. The optional discount rider allows first- and second-generation indemnity insurance holders to keep their existing policies but lower their premiums by excluding coverage for certain items such as manual therapy, extracorporeal shock wave therapy, MRI, and MRA. In addition, the policy conversion discount reduces premiums for a certain period for those who switch from an existing product to the fifth-generation indemnity insurance. While this could incentivize early indemnity insurance policyholders who face high premium burdens to switch, it could also result in decreased premium income for insurers.

With the implementation of these optional discount riders and conversion discounts, insurers’ sales strategies are also expected to change. Currently, sales are mainly limited to exclusive agents and focused on new subscribers, but once the discount programs are in place, insurers may compete more actively to attract policyholders interested in switching. However, excessive encouragement to switch could spark controversy over reduced coverage and lead to customer complaints, so insurers are likely to place greater importance on fulfilling their duty to explain and on complaint management.

The success or failure of the fifth-generation indemnity insurance is likely to depend not simply on initial sales figures, but on how many existing policyholders switch after the second half of the year, and how loss ratios and customer complaints are managed during the transition. An insurance industry official said, “When recommending a switch based only on premium savings, coverage reduction and the potential for future medical use must also be considered, so it is likely that insurers will continue to take a cautious approach rather than aggressively pursuing sales.”

Kim Jae-woo, Team Leader at the Samsung Securities Research Center, said, “The cautious attitude of insurers toward GA sales of indemnity insurance signals a shift to a more conservative sales strategy,” and added, “Going forward, there is a possibility that the focus will shift to direct sales and online channels.” He continued, “It will be necessary to monitor monthly new contract indicators to see how differences in company competitiveness under the new fifth-generation premium structure and renewal cycles affect market share.”

This content was produced with the assistance of AI translation services.